Core inflation was already above the Federal Reserve’s target even before the recent spike in energy prices, according to a key measure released Thursday. It provides the central bank with a snapshot of the situation leading to war with Iran.
The Commerce Department reported that the core consumer spending price index, which excludes food and energy, rose a seasonally adjusted 3% in February. The overall inflation rate for all items increased by 2.8%.
Both measurements were in line with the Dow Jones consensus. The core annual inflation rate was 0.1 percentage points lower than in January, but the headlines remained unchanged.
On a monthly basis, core and headline prices both rose 0.4%, also meeting expectations.
The Fed uses the PCE price index as its primary measure and forecasting tool for inflation. The Fed, which targets 2% inflation, believes the core is a better indicator of long-term trends.
In addition to the inflation measurements, the report also showed that personal income increased by 0.4%, while personal spending unexpectedly fell by 0.1% month-on-month. Economists had expected spending to rise 0.6% and income to rise 0.4%.
Separately, the Commerce Department reported that economic growth in the fourth quarter of 2025 will be slower than previously reported.
Gross domestic product (GDP), a measure of all goods and services produced, rose by just 0.5% on a seasonally adjusted annualized basis, down from 0.7% previously and 1.4% expected. The growth rate for the full year remained at 2.1%.
The ministry said the downward revision was mainly due to lower investment than previously indicated. A key measure of demand, known as real final sales to domestic private buyers, saw its growth rate cut to 1.8%, 0.6 percentage points lower than originally expected.
“Prices were flat in February, but incomes were weak and GDP was revised downward again, meaning stagflation was slightly worse than expected even before the Iran war started,” said David Russell, global head of market strategy at TradeStation. “As investors assess this fragile ceasefire, similarities to the 1970s may grow.”
This inflation data covers the period before the war that the United States and Israel launched against Iran, so it does not reflect the large jump in energy prices that occurred during the conflict. Oil prices rose more than $100 a barrel at one point, and pump prices rose more than $1 a gallon.
Although the data is somewhat old, it provides a view of the underlying situation before the war. Fed officials typically scrutinize these types of price spikes, viewing them as temporary and not representative of a broader trend.
Most Fed officials have been cautious about expressing their positions on interest rates publicly as they monitor developments. Minutes from the March Fed meeting released Wednesday showed policymakers generally leaning toward lowering rates this year, but concerned about both the dual mandate of stable prices and low unemployment.
At the same time, the market expects the Fed to keep policy on hold because the labor market is slowing but creating enough jobs to stabilize the unemployment rate. A report released by the Labor Department on Thursday showed that unemployment insurance claims rose 16,000 from the previous quarter to a seasonally adjusted 219,000. The total exceeded expectations of 210,000, but was roughly in line with recent trends.
Inflation has been above the Fed’s target for five years, but officials continue to express confidence that inflation will continue to decline slowly.
A more up-to-date picture of prices will come on Friday when the Bureau of Labor Statistics is scheduled to release its Consumer Price Index for March. Consensus forecasts were for headline prices to rise 0.9% for the month and inflation to be 3.3%, or almost 1 percentage point higher than in February. Core CPI is expected to be 0.3% monthly and 2.7% annually.
